Company tax rates reduction and increase to Small Business Entity threshold

TAX UPDATE

Company tax rates reduction and increase to Small Business Entity threshold

In brief:

Following the release of the 2016/17 Federal Budget, a number of measures were announced that offered tax concessions to small business and corporate taxpayers.

However, the ensuing Federal Election opened up a debate as to whether or not such measures would be introduced as announced, causing much uncertainty amongst the business community.

On Friday 31 March 2017, the amended Treasury Laws Amendment (Enterprise Tax Plan) Bill 2016 (the Bill) was finally passedby the Senate (with 6 Government amendments to be referred back to the House of Representatives for approval) subject to further approval when Parliament returns on 9 May 2017 before it is granted royal assent.

The key points arising from the Bill are:

With effect from 1 July 2016, companies with an annual turnover of less than $10 million will pay 2.5% less tax at the new corporate rate of 27.5%. At present, small businesses corporate taxpayers with turnover less than $2M have a tax rate of 28.5%, compared to a rate of 30% for turnover greater than $2M.

From 1 July 2017, companies with a turnover of up to $25 million will get the 2.5% reduction to 27.5%, with the drop then applying to businesses under $50 million in the 2018-2019 financial year.

The corporate tax rate will then progressively reduce to a rate of 25% by the 2026-2027 financial year, for those businesses with a turnover of less than $50M.

The unincorporated businesses tax discount has been extended to those businesses with an annual turnover of less than $5 million, and will be increased to a rate of 8% with effect from 1 July 2016 (increasing to a rate of 16% by the 2026-27 financial year), up to a maximum discount value of $1,000.

The small business entity aggregated turnover threshold is increased from $2 million to $10 million with effect from 1 July 2016.

The aggregated turnover threshold for access to the small business income tax offset will be limited to $5 million, and the current aggregated turnover threshold of $2 million will be retained for the small business capital gains tax concessions.

It remains to be seen whether the Government will be able to introduce tax cuts for larger businesses as proposed in the Budget, although they have indicated an intention to continue to support this.

Small business entity threshold

The Bill has extended access to a number of small business tax concessions by increasing the threshold for these concessions to $10 million, up from the current $2 million threshold.

From 1 July 2016, all businesses with aggregated annual turnover of less than $10 million will have access to the following concessions:

immediate deductibility for small business start-up expenses;

simplified depreciation rules, including access to immediate deductions for some depreciable assets (see further below);

simplified trading stock rules, giving businesses the option to avoid an end of year stocktake if the value of the stock has changed by less than $5,000;

roll-over for restructures of small businesses;

immediate deductions for certain prepaid business expenses;

a simplified method of paying PAYG instalments calculated by the ATO, rather than the PAYGI rate method which can be more time consuming to determine;

the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO;

annual apportionment of input tax credits for acquisitions and importations that are partly creditable; and

With effect from May 2015, small business taxpayers are eligible to claim an immediate deduction for asset purchases costing less than $20,000 up to 30 June 2017. From 1 July 2017, the asset cost threshold will reduce to $1,000 for an immediate deduction.

For these small businesses whose income exceeded $2M but was less than $10M, there was uncertainty as to whether they would in fact be able to access this concession during the 2017 income year, whilst awaiting the passing of law to increase the small business entity income threshold, thereby potentially delaying business and commercial decisions. The passing of this Bill through senate will now give such businesses the certainty they need, in order to proceed with the purchase of assets that qualify for the immediate deduction, or otherwise provide comfort that such a deduction will be available for assets purchased in the past 9 months.

We remind that in order to qualify for the immediate deduction, such asset purchases must not only be committed to and held by the business, but the asset must also be installed ready for use prior to 30 June 2017.

Small business entity definition – Same Same but Different

As stated above, the new legislation will amend the current definition of a ‘small business entity’ in the Income tax Assessment Act 1997 to increase the aggregated turnover threshold for eligibility as a small business entity from $2 million to $10 million.

For the purposes of the small business income tax offset, an entity is required to work out whether it is a small business entity for the income year as if each reference to a small business entity (which imposes the aggregated turnover threshold) to $10 million were a reference to $5 million.

The new legislation also retains the current aggregated turnover threshold of $2 million for the purposes of the small business CGT concessions. It achieves this by replacing references to ‘small business entity’ with the new defined term ‘CGT small business entity’.

An entity will be a CGT small business entity for an income year if that entity is a small business entity for the income year, and would still be a small business entity for the income year if each reference to a small business entity (which imposes the aggregated turnover threshold) to $10 million were a reference to $2 million.

This change does not affect the operation of the small business CGT concessions.

Franking of dividends

Whilst the standard corporate tax rate remains at 30% for companies with large turnover, they will continue to frank dividends at 30%. Companies with turnover less than $10M will also be able to frank dividends at the 30% rate. Notwithstanding they pay company tax at a lower rate.

Further, considerations should be given to the impact on franking accounts due to the change in corporate tax rate, which may be relevant in considering a company’s dividend policy.

Get in touch with us

The passing of this bill through Parliament now offers businesses more comfort when considering proposed transactions in light of the 2016/17 budget announcements, and will now enable them to consider the opportunities that may be available to them.

We welcome the passing of the Bill to increase the small business entity turnover threshold, as this will now give more businesses access to tax concessions which were previously not available to businesses with a turnover of more than $2 million.

However, the complexities in the differing thresholds require those entities wishing to access the small business tax concessions and incentives to carefully consider carefully their eligibility to the new rules.

Should you wish to discuss this further, please do not hesitate to contact our office.